Reviving the Abuja Securities and Commodity Exchange

16 May 2012

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Minister of Trade and Investment, Olusegun Aganga

Eromosele Abiodun writes on efforts being made by the Ministry of Trade and Investments and other stakeholders to revive the Abuja Securities & Commodity Exchange (ASCE)

A few years ago, the Nigerian financial service sector welcomed with joy the birth of a new exchange called the Abuja Securities & Commodity Exchange (ASCE). The ASCE was originally incorporated as a Abuja Stock Exchange on June 17, 1998. It commenced electronic trading in securities in May 2001 and was converted to a commodity exchange on August 8, 2001 and brought under the supervision of the then Federal Ministry of Commerce.

The conversion was premised on the need for an alternative institutional arrangement that would manage the effect of price fluctuations in the marketing of agricultural produce, which has adversely affected the earnings of farmers since the abolishment of commodity Boards in 1986.

Attempts to establish a commodity exchange and futures market in the country dates back to 1989 when an inter-ministerial technical committee was set up at the behest of the Central Bank of Nigeria (CBN) to look into how a futures exchange for agricultural commodities could be established to address frontally the agro-commodity marketing problems.

The ASCE was therefore created to be of immense benefits to farmers, agro-commodity processors and merchants, as it will serve as a veritable platform for them to mitigate the inherent risks in agricultural production and marketing.

However, the ASCE, which was created to  complement the Nigerian Stock Exchange (NSE), broaden the Nigerian economy and encourage unemployed youths to embrace agriculture, has  not met that expectation.

Experts said the purpose for which the ASCE was established had not been achieved because of the dominance of the stock market and Nigeria’s attitude towards agriculture.

Another reason attributed to the low level of interest in the commodity market was the boom in the stock market in recent years. Analysts also said the need to make quick money at the expense of other segments of the economy as it is with crude oil was largely responsible. Lack of proper understanding of how the commodity market works has also been blamed for the dwindling fortune and patronage of the commodity exchange.

Additionally, analysts said the ASCE  was  not working because other markets like bond markets and the Over the Counter (OTC) markets where bonds are traded were tied to the Nigerian stock market. They argued that if a futures market was allowed to run side-by-side the commodity exchange, a good section of investors will patronise the exchange.

Aganga’s Promise
Nonetheless, the ASCE may soon witness a revival if the recent promise by the Minister of Trade and Investment, Mr. Olusegun Aganga, to resuscitate the market is anything to go by.

Speaking to  journalists recently, Aganga restated the commitment of his ministry to restructure the ASCE as part of efforts to realise the agricultural transformation agenda of the Federal Government.

Aganga assured that his ministry was working with the ministries of finance and agriculture to ensure ASCE was restructured to play its role of commodities exchange and other ancillary services.

According to him, the resolve of the ministry of trade and investment to make Nigeria preferred destination for foreign direct investment in Africa and globally, irreversible.

He said in achieving the objective, the ministry’s policy thrust would include: development of productive sectors of the economy; promotion and diversification of export to both traditional and non-traditional markets, development of appropriate incentives to propel economic growth and progressive liberation of import regime to enhance competitiveness of domestic industries.

“Others are maximisation of benefits of international trade through capacity building and development of domestic trade and technology transfer; promotion and development of domestic trade including intra-state and inter-state commerce and attraction of foreign capital inflow into export-oriented production through special incentive packages and domestic support measures, ”he said.

Agange disclosed that the ministry had clustered its activities and deliverables around four specific performance indicators which are: Trade (international, regional and domestic), attracting investment into all sectors of the economy, industrial development and enterprise development.

“Our specific and measurable targets include: increasing Nigeria’s global competitive ranking by 103 positions over the next four years. This will catapult Nigeria from its current 137th position to 34, in global competitiveness by 2015. We also intend to occupy the top five position in Africa by that year. Improving Nigeria’s ranking in the Ease of Doing Business by 103 positions and enabling trade ranking by 75 positions. Increasing manufacturing contribution to Gross Domestic Product (GDP) from 4.5 per cent to eight per cent. Increasing trade contribution to GDP from 19 per cent to 24 per cent and improving the other global ranking parameters by at least 50 percentage points over the next five years, ”he added.

Specifically, Aganga said the ministry has inaugurated the Doing Business and Competitiveness Committee and Investor-Care Committee as the first step in a series of well paid out plans to meet the set targets.

Aganga disclosed that Nigeria’s industrial development efforts since independence had been ad hoc without a clearly defined pathway with definite targets and timelines.

“My ministry therefore considered it most expedient to involve all stakeholders, including academia in the conceptualisation and formulation of a new industry policy that would provide the framework for fast-tracking the country’s industrial revolution and attracting investment into the critical sectors of the economy especially where the country has competitive and comparative advantage, “he stated.

He explained that the policy document would look at specific interventions in the areas of industrial infrastructure development, innovation and technology, improvement in the business environment through rationalisation and simplification of business regulations among others.

Commodity Markets
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.

The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another.

The economic impact of the development of commodity markets is hard to over-estimate. Through the 19th century the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade.

Historically, dating from ancient Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardise and trade contracts in the delivery of such items, to render trade itself more smooth and predictable.

Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number.

This made them a form of commodity money - more than an "I.O.U." but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery-this made them like a modern futures contract.

Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting.

However, the commodity status of living things is always subject to doubt - it was hard to validate the health or existence of sheep or goats. Excuses for non-delivery were not unknown, and there are recovered Sumerian lettersthat complain of sickly goats, sheep that had already been fleeced, etc.

If a seller's reputation was good, individual "backers" or "bankers" could decide to take the risk of "clearing" a trade. The observation that trust is always required between market participants later led to credit money. But until relatively modern times, communication and credit were primitive.

Classical civilisations built complex global markets trading on gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness.

Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilisations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states, which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.

Commodity Market Size
Over the years, experience has shown that the trading of commodities consists of direct physical trading and derivatives trading.

Experts believe the commodities markets have seen an upturn in the volume of trading in recent years as a result.
In a chat with THISDAY, Managing Director and Chief Executive Officer, Markets Associates Limited, Mr. Adeyemi Opeyemi, said, “In the five years up to 2007, the value of global physical exports of commodities increased by 17 per cent while the notional value outstanding of commodity OTC derivatives increased more than 500 per cent and commodity derivative trading on exchanges more than 200 per cent.

“In the United States for example, the value of outstanding of banks’ OTC commodities’ derivatives contracts increased 27 per cent in 2007 to $9 trillion. OTC trading accounts for the majority of trading in gold and silver. Overall, precious metals accounted for 8 per cent of OTC commodities derivatives trading in 2007, down from their 55 per cent share a decade earlier as trading in energy derivatives rose, ” he said.

He added that global physical and derivative trading of commodities on exchanges increased more than a third in 2007 to reach 1,684 million contracts noting that agricultural contracts trading grew by 32 per cent in 2007, energy 29 per cent and industrial metals by 30 per cent. “Precious metals trading grew by 3 per cent, with higher volume in New York being partially offset by declining volume in Tokyo. Over 40 per cent of commodities trading on exchanges was conducted on US exchanges and a quarter in China. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers,” he added.

Investment Returns
He emphasised that one of the reasons most Nigerian investors preferred the equities market was the rate of return, which is relatively higher than other forms of investment.

Opeyemi stressed that while a commodity market may not give an investor outrageous return, “a five  per cent rate of return investors can as well have something to smile home with.”

According to him, “It is generally agreed that commodities have an expected return of five  per cent in real terms, which is based on the risk premium for 116 different commodities weighted equally since 1888. However, it is common for investment professionals to mistakenly claim there is no risk premium in commodities.

“Spot trading helps to facilitate good returns. Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets.”

He said one issue that presents major difficulty for creators of such instruments is the liability accruing to the purchaser.
“Unless the product or service can be guaranteed or insured to be free of liability based on where it came from and how it got to market, e.g. kilowatts must come to market free from legitimate claims for smog death from coal burning plants, wood must be free from claims that it comes from protected forests, royalty payments must be free of claims of plagiarism or piracy, it becomes impossible for sellers to guarantee a uniform delivery,” he said.

Governments, he stated, must provide a common regulatory or insurance standard and some release of liability, or at least a backing of the insurers, before a commodity market can begin trading.

Commodity Output
On his part, Dennis Orogun of Resource Benefits Associates Limited, pointed out that commodity thinking was undergoing a more direct revival.

According to him, the question whether community is a commodity, highlights one of the major issues with global commodity markets of either the positive or negative kind.
He added that a community must somehow believe that the commodity instrument was real, enforceable, and well worth paying for.

“A very substantial part of the anti-globalisation movement opposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current global credit money regime anchored by the Bank for International Settlements, does not in their view correspond to measurable benefits to human well-being worldwide.

“They seek a fairer way for societies to compete in the global markets that will not require conversion of natural capital to natural resources, nor human capital to move to developed nations in order to find work,” he said.

Commodity Markets and Protectionism
Orogun argued that developing countries (democratic or not) have been moved to harden their currencies, accept the International Monetary Fund (IMF) rules, join the World Trade Organisation (WTO), and submit to a broad regime of reforms that amount to a "hedge" against being isolated.

“China's entry into the WTO signalled  the end of truly isolated nations entirely managing their own currency and affairs. The need for stable currency and predictable clearing and rules-based handling of trade disputes, has led to a global trade hegemony - many nations "hedging" on a global scale against each other's anticipated "protectionism", were they to fail to join the WTO,” he said.

Tags: Nigeria, Business, Featured, ASCE, IMF, Abuja Securities

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